The Safest MLP Dividends

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Includes: AMJ, HEP, KMI, MMP, TCP
by: Brad Kenagy

Summary

In light of Kinder Morgan cutting their dividend, I looked for the safest dividends in the MLP sector.

I ran each of my MLP candidates through a screen and dividend test to determine the safest picks as well as looking at dividend growth and near-team debt maturities.

Three MLPs passed my tests: Holly Energy Partners, TC Pipelines LP, and Magellan Midstream Partners.

In this article, I will be searching for the safest dividends in the MLP sector (NYSEARCA:AMJ) in light of Kinder Morgan (NYSE:KMI) cutting their dividend this week. I know that Kinder Morgan is not an MLP, however their business in transportation, storage, etc, is what many MLPs are involved in. To get my initial list of MLPs worth considering, I used the Fidelity stock screener to find companies that are profitable, do not have an outsized yield, and have outperformed the MLP sector.

Screen Criteria

  • Sector: Energy
  • Security Type: Unit Trust Fund
  • Market capitalization: Over $1 billion
  • PE: >1 [Profitable]
  • Dividend Yield: Less than 15%
  • YTD Price Performance: Greater than -37% [AMJ ytd perform -41%, and applied 10% outperformance, then rounded to -37%]

Screen Results & Elimination

After running the screen, I found that twenty-one companies met these criteria and are listed in the table below.

Company Name

Symbol

ANTERO MIDSTREAM PARTNERS LP

(NYSE:AM)

BUCKEYE PARTNERS LP

(NYSE:BPL)

BOARDWALK PIPELINE PARTNERS LP

(NYSE:BWP)

CVR REFINING LP

(NYSE:CVRR)

ENTERPRISE PRODUCTS PARTNERS LP

(NYSE:EPD)

EQT MIDSTREAM PARTNERS LP

(NYSE:EQM)

GENESIS ENERGY LP

(NYSE:GEL)

HOLLY ENERGY PARTNERS LP

(NYSE:HEP)

MAGELLAN MIDSTREAM PARTNERS LP

(NYSE:MMP)

NUSTAR ENERGY LP

(NYSE:NS)

NORTHERN TIER ENERGY LP

(NYSE:NTI)

ONEOK PARTNERS LP

(NYSE:OKS)

PHILLIPS 66 PARTNERS LP

(NYSE:PSXP)

SPECTRA ENERGY PARTNERS LP

(NYSE:SEP)

SHELL MIDSTREAM PARTNERS LP

(NYSE:SHLX)

SUNOCO LP

(NYSE:SUN)

TC PIPELINES LP

(NYSE:TCP)

TALLGRASS ENERGY PARTNERS LP

(NYSE:TEP)

TESORO LOGISTICS LP

(NYSE:TLLP)

VALERO ENERGY PARTNERS LP

(NYSE:VLP)

VIPER ENERGY PARTNERS LP

(NASDAQ:VNOM)

Eliminations

Now that I had my initial list of MLPs, I looked at the dividend history of each company and eliminated those companies that have either not had three full years of dividend history or have cut their dividend at least once in the last three years. In addition, I also eliminated Sunoco because as you will see below in the next section I need the last four quarters of financial data. Looking at the financials for Sunoco on Gurufocus I found that the company had a missing quarter, therefore I eliminated them.

The list of companies I eliminated were: Antero Midstream, Boardwalk Pipeline, CVR refining, Northern Tier Energy, Phillips 66 Partners, Shell Midstream Partners, Sunoco, Tallgrass Energy Partners, Valero Energy Partners and Viper Energy Partners.

Semi-Final Candidates

After the above eliminations, I was left with eleven companies, which are listed in the table below. With these eleven companies, I put each of them through a dividend test to see what percentage of stressed free cash flows dividends would be.

Company Name

Symbol

BUCKEYE PARTNERS LP

BPL

ENTERPRISE PRODUCTS PARTNERS LP

EPD

EQT MIDSTREAM PARTNERS LP

EQM

GENESIS ENERGY LP

GEL

HOLLY ENERGY PARTNERS LP

HEP

MAGELLAN MIDSTREAM PARTNERS LP

MMP

NUSTAR ENERGY LP

NS

ONEOK PARTNERS LP

OKS

SPECTRA ENERGY PARTNERS LP

SEP

TC PIPELINES LP

TCP

TESORO LOGISTICS LP

TLLP

Dividend Test Conditions

The three bullets below explain how & why I got the data in the table below for this dividend test. My goal is to look for those companies that have the lowest dividends as percentage of free cash flows.

  • Median Cash Flows from Operations: I took the median cash flows from operations over the last four quarters and multiplied by four to get an annual estimated level of cash flows.
  • Median CAPEX: I then used the same process as above and took the median CAPEX over the last four quarters, and applied a 50% cut to this level, before annualizing that level. I did this because if oil prices stay low or go even lower, I believe companies will continue cutting CAPEX.
  • Cash Flows for Dividends Growth: I calculated the dividend growth rate/quarter over the last four quarters for each company and applied that rate to the most recent quarter's dividend. I did this to see the level of cash flows going to dividends, because many MLPs in spite of lower oil & gas prices have continued increasing their dividends.
  • Example: Below I have provided an example of my process, which shows that as of the end of the most recent quarter Kinder Morgan was significantly above my 100% threshold for dividends as a percentage of free cash flows.

KMI

 

CF From Ops

CAPEX

 

CF For Divs

 

Q4 2014

$975

-$939

 

-$978

 

Q1 2015

$1,256

-$897

 

-$972

 

Q2 2015

$1,282

-$1,012

 

-$1,050

 

Q3 2015

$969

-$1,090

 

-$1,087

 
           
 

Median CF From Ops

Median CAPEX

 

Dividend Growth Rate/QTR

 
 

$1,116

-$976

 

3.59%

 
           
 

CF From Ops

CAPEX

FCF

CF For Divs.

Div as % of FCF

Annual Stressed Estimate

$4,462

-$1,951

$2,511

$4,504

179.37%

Dividend Test Results

To save space I will post the results of running each of my 11 semi-final candidates through the table in the previous section. By looking for the companies with the lowest dividends as a percentage of free cash flows, I am able to find those companies with the most flexibility to continue to increase their dividend or if things get worse, be able to maintain and not cut their dividend. The results of running each company through this test show that out of the eleven companies, only three have a dividend to free cash ratio of less than 100% and those companies are Holly Energy Partners, TC Pipelines LP, and Magellan Midstream Partners. Those three companies are my selections for the safest MLPs in the sector and in my opinion are unlikely to cut their dividends.

Company

Symbol

Dividends as % of FCF

HOLLY ENERGY PARTNERS LP

HEP

74.13%

TC PIPELINES LP

TCP

84.89%

MAGELLAN MIDSTREAM PARTNERS LP

MMP

87.51%

BUCKEYE PARTNERS LP

BPL

105.17%

SPECTRA ENERGY PARTNERS LP

SEP

111.67%

NUSTAR ENERGY LP

NS

111.68%

TESORO LOGISTICS LP

TLLP

116.57%

EQT MIDSTREAM PARTNERS LP

EQM

131.16%

ENTERPRISE PRODUCTS PARTNERS LP

EPD

155.56%

ONEOK PARTNERS LP

OKS

175.56%

GENESIS ENERGY LP

GEL

507.62%

Why consider these MLPs

For each of the three companies that passed my tests, I will detail below that dividend growth and near-term debt payments are in these companies favor and when combined with my dividends as a percentage of free cash flow test from above, these companies in my opinion are worthy of considering as quality MLPs with a safe dividend.

-Dividend Growth: Each of these three companies has been able to increase their dividends in spite of lower oil prices. As you can see in the monthly crude oil chart below, each of these companies was able to increase their dividend through the period when oil fell from a high of over $145 to the low $30 level in 2008/2009. In addition, the drop in oil prices at that time was much faster and more severe than the current decline.

-Oil Price Impact on Dividends: After looking at the above chart of crude oil and then the dividend charts for each individual company below, it is easy to see that the price of crude oil is not highly correlated to dividend payments.

-No near-team debt Maturities: For each of these companies I looked at the debt maturity picture to see what maturities if any were coming up soon and found that each company has no major debt maturities for at least two years, which gives all three companies a lot of flexibility in a low oil price environment.

[Chart from ThinkorSwim]

Holly Energy Partners

Holy Energy Partners operates a system of petroleum product and crude gathering pipelines and terminals mainly in the inland United States. The following image below shows that HEP has facilities mainly in the southwestern United States with a few facilities in the northwest as well.

[Chart from HEP operations overview]

Dividend Growth

As you can see in the chart below, HEP has grown its dividend every year for the last ten years and has done so at an average of 6.90%/year. As I noted above, when you look at a chart of crude oil and a chart of the dividend growth, it is quite astounding to see that pretty much no matter what the oil environment has been over the last 10+ years HEP has been able to increase the dividend.

[Chart Data from Dividendchannel.com]

Debt Outlook

The chart below shows that HEP does not have any bond maturities until 2018 & 2020 where they owe $150 million & $300 million respectively. Therefore, I believe HEP will not be in any danger of cutting its dividend due to issues with maturing debt anytime in the next 3 years.

[Image from Morningstar]

TC Pipelines LP

TC Pipelines has interests in natural gas pipelines, which supply approximately eight per cent of the U.S. daily gas volumes. As you can see in the chart below TC Pipelines go to the Midwest, which is known for its cold winter temperatures, which helps support volumes flowing through their pipelines.

[TC Pipelines Investor Factsheet]

Dividend Growth

As you can see in the chart below, TCP has grown its dividend every year for the last fifteen years and has done so at an average of 4.36%/year. While the dividend growth is not as fast as HEP or MMP, the growth is still quality dividend growth, through multiple periods of crude oil boom and bust.

[Chart Data from Dividendchannel.com]

Debt Outlook

The chart below shows that TCP does not have any bond maturities until 2021 & 2025 where they owe $350 million & $250 million in 2021 and $350 million in 2025. Therefore, I believe TCP will not be in any danger of cutting its dividend due to issues with maturing debt anytime in the next 3 years.

[Image from Morningstar]

Magellan Midstream Partners

I wrote about Magellan Midstream earlier this year as a quality play for growth & income in the energy sector. Magellan operates refined products pipelines & storage, crude oil pipelines & storage and marine storage facilities. The following statement from Magellan shows the size of their pipeline network: "We can tap into nearly 50% of the nation's refining capacity." [Magellan company description] The chart below shows an overview of all the pipelines and terminals that Magellan operates or has interests in.

[Chart from MMP Company Overview]

Dividend Growth

As you can see in the chart below, MMP has grown its dividend every year for the last thirteen years and has done so at an average of 12.32%/year. Out of the three companies that made my final list, MMP has had the highest dividend growth and has been to support that dividend growth because continued growth projects and because of its massive scale that I mentioned above in my overview.

[Chart Data from Dividendchannel.com]

Debt Outlook

The chart below shows that MMP does have some debt maturities coming up in the next year. MMP has a $250 debt maturity in October 2016 and in the last twelve months; MMP has generated $555 million in free cash flow alone, therefore they should be able to easily pay this off without having to make any dividend cuts. After that maturity, MMP has a $250 million maturity in 2018 & a $550 million maturity 2019, then none until 2025 and beyond. I believe MMP will not be in any danger of cutting its dividend due to issues with maturing debt anytime in the next 3 years.

[Image from Morningstar]

Closing Thoughts

In closing, I believe Holly Energy Partners, TC Pipelines LP and Magellan Midstream Partners are all worthy of further research for MLP investor looking for safe dividends in the MLP sector. I believe this because each company has a long history of dividend growth during good & bad times, each has no near-team debt maturities that would warrant a dividend cut and each company has the flexibility to weather these tough market conditions for MLPs as determined by my dividends to free cash flow test.

Disclaimer: See here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.